Company in the news: Royal Bank of Scotland

RBS made headlines recently when its chief, Stephen Hester, agreed to leave the troubled bank. So, is it time to buy the shares, or should you sell? Phil Oakley reports.

Chief executive Stephen Hester's departure from Royal Bank of Scotland (RBS) last week has made for plenty of headlines. But should you buy or sell? One good way to value a bank is to look at its return on equity (ROE), and then compare its share price with its book value per share (price-to-book, or p/b).

ROE looks at the profit (after tax) made as a percentage of money (equity) invested by shareholders. If a bank makes high returns, then it's worth paying a premium for its p/b could justifiably be above one.

Let's say that, because of the risks involved, investors expect a 10% return from a bank. If the bank has a ROE of 10%, then it would justify a p/b of one, whereas a 5% ROE would justify a p/b of 0.5.

Looking at RBS, City analysts expect a ROE of 2.6% in 2013, rising to 6% in 2016. These are pretty poor returns, given the amount of debt that RBS carries. Yet the shares already trade at 0.6 times book value. So a lot of the recovery looks to be priced in. A new CEO will have to do something radical to deliver meaningful upside from here.

Verdict: avoid

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